Evolutionary cycles in the payments system

Chris Hamilton APCA CEOThe publication of the Reserve Bank’s Conclusions for its two year Innovation Review is shaping up as the catalyst for a new round of structural evolution in the Australian payments system. Payment participants have been set a challenge: establish a better long-term payments platform.

Doubtless, effective coordination of industry participants is needed to meet the challenge. Nevertheless, it will be good old-fashioned competition that delivers the new products that ultimately benefit customers. Bluntly, new payment systems only take off when schemes and participants work out how to use them to offer stuff that customers want, and will pay for.

To see the logic of this, it helps to think in evolutionary terms. At the end of the 80's, “payments” still meant cash or cheques – with voucher-based card systems as an add-on. Starting around that time, Australia got an evolutionary jump on many other countries, establishing the basic electronic “rails” on which our payments system still runs.

Within 10 years, the financial institutions working with the Reserve Bank:

  • created the current real-time high-value payments infrastructure;
  • built and consolidated direct entry systems to deliver salaries and government payments into accounts electronically, and then support all other payments into accounts;
  • extended and consolidated ATM networks; and
  • built an integrated point of sale network allowing full electronic processing of consumer card transactions.

It is no coincidence that APCA was formed in 1992 as a venue for industry coordination to assist in managing these developments, and administering some of the results.

With the basic rails set up by the late 90’s, a deregulated, more competitive financial sector could work out how to use these rails to serve customers better, and make a profit. Thus, a cycle of structural evolution gave way to a cycle of product evolution, visible initially in card products to meet every taste and budget: low-rate cards, rewards points, cobranding, premium cards, companion cards, pre-paid and so on. New products were fuelled by the internet revolution, too: networks and systems designed for a different era proved themselves adaptable to the internet. “Pay anyone” screens and card-not-present transactions are examples. BPAY’s rapid expansion in this period was driven by similar factors.

The 15 year cycle of product innovation is nowhere near tapering off: new entrants like PayPal have found ways to carve out niches, and incumbents are spurred to respond competitively. Mobile commerce and social networking appear to offer as many new competitive opportunities as the internet. Competitors both large (ANZ’s GoMoney, CBA’s Kaching), small (mHITs text-based mobile service) and alternative (PayPal’s Here) are still engaged in the rapid deployment of new products in these areas. This suggests there is plenty more energy left in this cycle of product innovation.

Even so, the next cycle of platform evolution is emerging. The global cards system is well down the track on converting to chip; contactless has also moved ahead quickly in Australia, enabling card activity to migrate onto the mobile in the future. The industry has been working on enhanced electronic payments as well, albeit rather more slowly.

The RBA’s Conclusions paper amounts to a call for more aggressive platform evolution. Much reference is made to overseas developments like the UK’s Faster Payments service. Perhaps surprisingly for a paper focused on innovation in the payments system, it says very little about the long cycle of competitive product innovation in Australia. This may be because the RBA thinks the payments market is working: there is no need for public policy comment or direction on this aspect.

In essence, the RBA proposes faster modification of the direct entry system to speed up payment delivery, and the development of a new platform for retail real-time payments. The industry has been given three months to give feedback, and APCA is attempting to promote as much consensus as possible. When it comes to platform evolution, collaboration rather than competition is the key.

We are yet to finalise views, but my sense is that payment participants broadly acknowledge the need for structural evolution to set Australia up for the digital economy of the future – although there are many views on what to do and in what order. But they are all pretty clear on one thing, and history confirms it: whatever enhancements we make to the basic platform, long-term customer benefit depends on businesses developing products and getting customers to use them. Competition, not collaboration, is key.

The UK’s Faster Payments service is a case in point. It has been around for four years, but did little volume in its first two years. This is a little surprising: in the UK, electronic payments have a three day cycle and there is no equivalent of BPAY. In that environment, one might have thought a new real-time service would sell itself. But the development was originally approached as a matter of public policy, with relatively little regard for market economics. It is now doing good business, because the participants have worked out how money can be made from competitively offering new services people want, such as Barclay’s Pingit, an instant mobile payment service.

So as we collaborate to renovate the platform, we need to leave room for the competition and product innovation that will ultimately deliver the goods. This time around, there is an extra twist:  competition and product development is going to happen as much amongst payment schemes and networks as amongst financial institutions and other payment providers. If new real-time payments architecture is available for everyone to use in a few years’ time, how will the likes of Visa, MasterCard, BPAY and PayPal react? We don’t yet know, of course, but you can be sure it will involve new products and services designed to win business.

This makes for a more complex, multi-layered competitive environment, and that can make it harder to get competitors to collaborate too. But the principles remain the same: As we enter the next cycle of structural evolution, we need to collaborate on the platform, leaving room for future product competition to deliver what the end customer really wants. This combination will get the best long term results for the economy.

Full Story


Account switching mailbox open for business

Account switchingAPCA’s new switching “mailbox” commenced operation on 2 July 2012 with the launch of the account switching package announced last year by the Hon. Wayne Swan, Deputy Prime Minister and Treasurer.

APCA has worked closely with members, the government and other stakeholders to implement by 2 July the account switching recommendations made by Bernie Fraser in 2011. This included building an electronic mailbox and coordinating changes to the direct entry system to accommodate the new switching package.

Under the new package, when a consumer opens a transaction account with a new financial institution, the institution is obliged to help the new customer switch their direct debit and credit arrangements over from the old account.

Consumers can now choose to deal solely with their new financial institution. At a new customer’s request, the new financial institution will get a list of their regular direct debits and direct credits from their old financial institution, and then notify their billers and other businesses of their new account details. These notifications will be received by direct entry businesses via their own financial institution.

The APCA mailbox enables financial institutions to exchange direct credit and direct debit details between each other when switching accounts as well as when notifying business users of changes to their customers’ direct entry arrangements. Currently, there are some 120 financial institutions connected to the APCA mailbox.

Click here for more information on Account Switching on the APCA website

Click here for more information on Account Switching on ASIC’s MoneySmart website.

Click here for more information about the Government’s Banking Reform Package on the Australian Banking Reforms website.

Full Story


APCA releases final report on its cheque consultation

Decline of chequesOn 15 May 2012, APCA released the final report from its public consultation on the role of cheques in Australian payments, The Decline of Cheques: Building a Bridge to the Digital Economy.

The Report confirms that on current evidence there is no need to consider closing Australia’s cheque system despite the irreversible decline of cheques. Instead, Australian cheque providers and users can continue to make their own choices about replacing cheques with electronic alternatives.

However, the consultation found that the groups of Australians most likely to be affected as cheques continue to decline are the aged, those living in rural and regional Australia and not-for-profit organisations. APCA believes the access and usability issues that make it challenging for these groups to move away from cheques also make it difficult for them to share in the benefits of the emerging digital economy.

The Report provides a plan of action for managing the decline of cheques including key measures to improve access to the digital economy. These include industry collaboration to enhance the payments system to support emerging payment products, deeper engagement with government and stakeholders to address existing barriers, and efforts to boost public awareness of the benefits of electronic alternatives, and how best to access these alternatives.

Click here for more information about the consultation process and to access the final report.

Full Story


Settlement through LVSS underway

On 13 August 2012, domestic debit card transactions commenced settlement through the Reserve Bank of Australia’s (RBA) new Low Value Settlement Service (LVSS). Settlement of direct debit and direct credit transactions through the LVSS has been occurring since May 2012.

APCA has been working with industry and the RBA to implement the LVSS. The LVSS provides enhanced settlement capabilities in the Reserve Bank Information and Transfer System (RITS) through additional flexibility and functionality.

The RBA required all participating members of the Australian Paper Clearing System (cheques), Bulk Electronic Clearing System (direct debits and direct credits) and the Consumer Electronic Clearing System (domestic debit cards) to transition to the LVSS according to a timetable agreed with the industry.

Implementation of the LVSS involves replacing existing settlement interfaces. APCA has coordinated the changes required to each clearing system’s rules as well as industry testing for each system’s clearing and settlement processes.

Testing is currently underway for APCS (cheques), with settlement expected to transition to the LVSS in October 2012.

Full Story


APCA releases fraud statistics for year end December 2011

Australian credit cardPayments fraud data released by APCA in July 2012 for the calendar year 2011, show that averaged across all payment cards issued in Australia, card fraud has increased from 37.9 cents to 51.1 cents in every $1,000 transacted. Within this overall rate:

- Proprietary debit card fraud (PIN-only cards – POS and ATM transactions) dropped from 7.9 cents to 4.9 cents in every $1,000 transacted.

- Scheme credit, debit and charge card fraud (signature-permitted debit, credit and charge cards and card-not-present transactions) increased from 67.2 cents to 96 cents in every $1,000 transacted.

As seen in the previous year’s results, skimming fraud has continued to decline, while card not present (CNP) fraud — occurring when a card is used online, by mail or by phone — has risen.


The latest figures show that skimming fraud on proprietary debit is at its lowest since 2009, reflecting the continued hard work by industry and law enforcement to tackle this type of fraud. On scheme credit, debit and charge cards (issued in Australia and overseas), counterfeit and skimming fraud in Australia has declined by 18%. 

Card not present

CNP fraud, however, is continuing to rise and now accounts for 71% of the value of fraud on scheme credit, debit and charge cards issued in Australia. More than half of this fraud occurred overseas.

The increase in CNP fraud occurring in Australia is a reflection of the growing trend for businesses to move online, in particular small and medium sized retailers. APCA is developing free online training on how retailers can protect themselves when using the internet to do business. APCA expects to launch the training in September 2012.

Click here to view the 2011 fraud statistics.

Full Story


RBA releases innovation review conclusions

Reserve Bank of AustraliaThe Reserve Bank of Australia (RBA) released its Strategic Review of Innovation in the Payments System: Conclusions on 7 June 2012.

In the Conclusions paper, the RBA has announced that the Payments System Board (PSB) will at times set strategic objectives for the payments system that will take into account the interests of stakeholders, including businesses and consumers.

To establish more direct dialogue between industry and the PSB, the RBA proposes working with industry to form an enhanced industry coordination body, which builds upon the existing APCA structure, to undertake this role.

The Conclusions paper included an initial list of strategic objectives covering such matters as same day settlement of direct entry payments, future evolution towards real-time payments, payments out of hours, richer remittance information with payments and simpler payments addressing.

The RBA is seeking feedback on the initial strategic objectives by the end of 2012. APCA is currently engaging with members and the wider industry to develop an industry response.

Click here to link to APCA’s media release about the Conclusions Paper.

Click here to link to APCA’s submissions to the innovation review.

Click here for the RBA's Conclusions Paper.

Full Story


New surcharging standard

On 12 June 2012, the RBA announced its intention to vary the surcharging standards to allow card scheme rules to limit surcharges imposed by merchants to the reasonable cost of card acceptance. The varied Standards will come into force on 1 January 2013.

The surcharging review consultation paper outlined proposals to allow card schemes to limit the surcharge that a merchant could levy on cardholders. It also outlined proposals for improved disclosure to cardholders and additional data collection by the regulator.

The decision to vary the standards addresses the concern that surcharges were being charged in excess of the merchant’s card acceptance costs, or were ‘blended’ across card schemes even though the acceptance costs may be higher for some cards than others. The rationale for the variation to the standards is discussed in the RBA’s Regulation Impact Statement. The RBA has also published a draft Guidance Note to clarify what constitutes the reasonable cost of acceptance.

Click here for more information.

Click here to link to APCA’s submission to the review of surcharging standards.

Full Story


EFTPOS regulatory framework

EFTPOS terminalIn June 2012, the Reserve Bank of Australia (RBA) announced its intention to implement a new designation for EFTPOS to define the system based on the Scheme Rules of eftpos Payments Australia (ePAL), and released a consultation paper "Review of the Regulatory Framework for the EFTPOS System: Consultation on Options for Reform."

The EFTPOS system was designated in 2004 under the Payment Systems (Regulation) Act, with an interchange fee standard and access regime introduced in 2006. Since then there have been significant changes to EFTPOS, most notably the establishment of ePAL in 2009 and its decision to introduce multilateral interchange fees. These changes prompted the RBA to consult on the most appropriate form of designation for the system.

In its Consultation paper, the RBA is seeking further views on the future regulation of EFTPOS interchange fees, access to the EFTPOS system and its governance.

APCA made its submission to the RBA on 31 July 2012. In the submission, APCA indicates support for either removal of interchange fee regulation altogether or else a common pricing fee schedule for bilateral and multilateral arrangements. APCA also notes that the RBA Access Regime and EFTPOS Access Code are no longer required and recommends access be managed through ePAL.

Click here for more information.

Full Story



Payments New Zealand Conference

The Payments New Zealand conference was held on 21 and 22 May in Auckland. The theme of the conference was “Changing the Game”, focusing on new technology and the opportunities for payments industry participants to innovate collaboratively to support competition and provide access to new entrants. Recent developments for contactless and mobile payments technology were presented, including the joint venture between New Zealand’s three mobile network operators and the local payments provider, Paymark, to launch a trusted service manager to support NFC-based mobile payments.

Click here for more information about Payments New Zealand Conference.


Following their conference, Payments New Zealand hosted on 23 and 24 May the International Council of Payment Association Chief Executives (ICPACE) annual meeting in Auckland. ICPACE attendees included representatives from the UK Payments Administration and Payments Council, NACHA (US), Payments Association of South Africa, Irish Payment Services Organisation, Canadian Payments Associations and APCA.

Topics discussed included regulation, strategic planning, stakeholder engagement, international payments, mobile payments and managing cheque decline.

Payments Panorama

Payments Panorama, the Canadian Payments Association’s biannual conference, was held on 6 to 8 June 2012 in Quebec City. The conference attracted 400 attendees, primarily from Canadian financial institutions, as well as schemes and stakeholders. The discussion topics included the final report and recommendations from the Canadian Government's Payments Taskforce, credit and debit card regulation, the decline of cheques in North America, the impact of the Dodd-Frank consumer protection regulations in the US and mobile payments, particularly the recent release of the Canadian Bankers Association mobile NFC standard.

Click here for more information about Payments Panorama.


Canadian Bankers Association releases mobile payments standard

International PaymentsOn 14 May the Canadian Bankers Association released new voluntary guidelines for mobile payments called the Mobile Reference Model. The guidelines outline how mobile payment services can be offered in the Canadian market, and cover the roles of the major participants including financial institutions, payment card companies, mobile network operators and merchants.

Click here for more information.


APCA Stakeholder Forum

The second meeting of the APCA Stakeholder Forum was held in Sydney on Thursday, 14 June 2012. The meeting was chaired by Anne Hurley and attended by 50 non-member stakeholders as well as APCA members and staff.

The Forum included a panel discussion on mobile payments and sessions on the Reserve Bank of Australia's Innovation Review conclusions, the outcome of APCA's Future of Cheques Consultation, and the planning for APCA’s next payments roadmap.

APCA sees the Forum as a central component of its stakeholder engagement activities and appreciates the time and contributions from attendees.

Full Story


Celebrating 20 years of APCA: Symposium and Dinner

To mark its 20th anniversary as the payments industry self-regulatory body, APCA held a Symposium and Dinner on 28 May at the Sydney Park Hyatt. The event brought together some 90 business and community leaders to discuss the future of payments.

The Governor of the Reserve Bank of Australia, Glenn Stevens, opened the Symposium with a keynote address on innovation in the payments system and the role of the Payments System Board in setting strategic objectives.

The Symposium was facilitated by well known futurist, David Birch, who delivered a range of thought-provoking insights into payments, innovation and what the future holds. Other guest international speakers included Swift CEO Lazaro Campos, PayPal Senior Vice-President Rupert Keeley and the CEOs from key payments organisations in Canada, New Zealand, South Africa and the United Kingdom who took part in a panel session.

The guest speaker at the Dinner was Lindsay Tanner, Former Minister for Finance and Deregulation. Guests were entertained by celebrity MC James O’Loghlin and string quartet “Classic Strings”.

To watch presentations and view slides from the day, visit the APCA Symposium page. 

For information on APCA’s achievements over the past 20 years click here.

APCA 20th anniversary media release is available here.

Full Story
Glenn StevensChris HamiltonGlenn Stevens Mckinsey and CoLazaro Campos ICPACE PanelRupert Keeley David BirchVipin Kalra Leslie Martin Russell ZimmermanJames O'Loghlin Lindsay Tanner